Morgan Stanley Warns Summer Stock Rally at Risk; Fed Rate Hike Seen 82% Likely

According to Morgan Stanley, last week the investment bank warned that three emerging risks could derail the U.S. stock market's summer gains, despite July typically being one of the market's strongest months. The bank's global head of fixed income research, Andrew Sheets, highlighted concerns over a renewed Iran conflict following the breakdown of a ceasefire deal, potential Federal Reserve rate hikes to combat inflation, and a potential slowdown in artificial intelligence capital spending by tech giants.

Market data shows the Nasdaq 100 has swung sharply in recent weeks after strong second-quarter gains, with volatile trading in chip and memory stocks. The Fed Watch tool indicates an 82% probability of at least one rate hike by year-end, while Morgan Stanley's base case forecasts AI investment will grow from about $800 billion in 2026 to $1.2 trillion in 2027. Second-quarter earnings reports may reveal that major tech companies are becoming more cautious on AI spending, posing a significant risk given market expectations hinge heavily on continued AI investment momentum.